CIBC’s new Visa-branded debit card is operating in violation of the federal government’s new voluntary code of conduct for the payments industry.

Canadian Imperial Bank of Commerce’s new Visa-branded debit card is operating in violation of the federal government’s new voluntary code of conduct for the payments industry, the Star has learned.

Less than three months after Ottawa’s code went into effect, the issue is reigniting calls for regulation of the $171-billion debit market – even though CIBC and Visa Canada say the problem is very limited in scope.

The breach is occurring because some purchases made in Canadian stores with the cards are being routed over the Visa network instead of Interac.

That is not permitted under the code because merchants fear that without that protection, the fees they pay to accept the cards will skyrocket as global card companies like Visa and MasterCard take over the Canadian debit market.

Visa acknowledges that some merchants are being charged incorrect transaction fees – which it says so far amount to only a few hundred dollars.

Now, two weeks after the first Visa-branded debit card hit the Canadian market, retailers and small business are crying foul. Federal Finance Minister Jim Flaherty is threatening to impose binding regulation if necessary.

“We are concerned by any possible violation of the code. Our government created a voluntary code, but we have been clear that if necessary the code will become involuntary,” Flaherty told the Star.

Flaherty said the Financial Consumer Agency of Canada is aware of the situation and is looking into it.

The list of affected retailers includes major players such as Wal-Mart Canada, Williams-Sonoma, The Gap, Banana Republic, Starbucks, Old Navy and Pottery Barn.

“We don’t believe this is just contravening the spirit of the code. We believe it is contravening the code,” said Diane Brisebois, president and chief executive officer of the Retail Council of Canada.

The council has written to Flaherty on the issue and is scheduled to meet with him next week. “We’re going to push (for) regulation,” said Brisebois.

The Canadian Federation of Independent Business is also hearing complaints from its members.

“We will be freaking out at the highest levels if CIBC and Visa have arranged a back-door entry into the domestic debit market business,” said Dan Kelly, national vice-president.

“That would be an absolute clear violation of the code. No product should have been launched that could run on the credit rails for domestic debit …CIBC should immediately rip off the Visa logo and reissue the cards until they can sort out the problem.”

CIBC and Visa say the problem involves “isolated” processing issues occurring at a small number of retailers and payment processors.

Visa said fixing the problem is a “high priority,” but has no firm deadline for getting the job done. Sources say a full fix could take months.

That’s partially because major technology changes are considered risky during the Christmas shopping season when transaction volumes are high.

“We are troubleshooting as fast as we can to ensure that what’s happening that is inappropriate in the marketplace, no longer happens,” said Mike Bradley, head of products at Visa Canada.

The Consumers Association of Canada said consumers are confused about whether CIBC’s new Visa-branded Advantage Card is a debit card or credit card.

“The confusion is being caused by the way it’s being handled. The cards are just turning up in the mail,” said association president Bruce Cran.

For its part, Visa is promising that retailers will be reimbursed for incorrect transaction fees, which they say add up to only a “few hundred dollars” so far.

Additionally, “less than one per cent” of total transactions conducted with the new card have been affected, Visa and CIBC said.

Neither would disclose the total number of transactions or cards in circulation. CIBC’s new Advantage Card was launched Oct. 18.

“As with the launch of any new product — particularly one like this which is the first of its kind in Canada — it’s understandable there may be a few initial wrinkles. But these have been extremely minor in nature,” said CIBC spokesman Rob McLeod.

Visa’s Bradley also argued that “challenges” are often inevitable with major product launches.

Brisebois scoffed at those explanations. “Give us a break,” she said. “This is not something you came up with yesterday. You had plenty of time to get it right.”

The Retail Council said the total cost to merchants is still unknown. “We’re going to charge Visa and the banks for all the work they’ve created for us,” Brisebois added.

The problem is not with CIBC’s new card itself but with how some debit transactions are being processed, Visa said.

In some cases, cashiers are mistaking the new CIBC debit card, which bears a Visa logo on the front, as a credit card.

They swipe the card’s magnetic stripe. The payment is then processed as a “Visa Debit” transaction even though the cashier has chosen to process it as a credit card.

Customers are then being asked to sign to complete their purchase despite the fact that signature debit does not exist in Canada.

In those cases, no PIN is requested and customers are not getting a choice of which bank account the funds are debited from.

In other cases, cashiers are processing the debit card correctly at the register but the retailer’s own computer system is routing the transaction incorrectly, Visa said.

One of the payment processors affected, Chase Paymentech, said it is aware of the problem and is working with Visa to determine the cause and fix it as quickly as possible.

“To ensure that our merchant customers are not financially disadvantaged as a result of swiping these Visa Debit Cards at the point of sale, we will absorb the full cost of the Visa Debit interchange for these transactions and only charge our merchants their current Interac Debit transaction rate,” Sam Jawad, president of ChasePaymentech Canada, said in an email.

Visa confirmed there are also other affected payment processors but declined to provide names.

“We take code compliance very seriously but we’d like to keep this in the context that it’s a few hundred dollars of interchange that merchants that are involved in this will never have to pay,” Bradley said.

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